Regulators Disclose Criteria for Bank ‘Stress Tests’ – NYTimes.com
Regulators Disclose Criteria for Bank ‘Stress Tests’
By ERIC DASH
Federal regulators released the criteria they used to assess the financial health of the nation’s 19 biggest banks on Friday, but provided little new information for investors to distinguish the industry’s weak players from the strong.
In a 21-page report, the Federal Reserve regulators broadly laid out the tools they used to project bank losses if the economy worsens, and officials established an unspecified baseline to measure how much additional capital the banks should add as a buffer against higher losses. But they provided no concrete metrics to assess the depths of the troubles facing the industry or specific banks.
Still, the Federal Reserve report suggested that regulators are focusing on the amount of capital that they want banks to hold in common stock, which makes it easier for them to absorb future losses as the recession wears on. That could force at least a handful of the 19 banks to raise significant amounts of new capital and could lead to greater government ownership stakes in the banks.
“Losses associated with the deepening recession and financial market turmoil have substantially reduced the capital of some banks,” the Federal Reserve report on the stress test said. “Lower overall levels of capital — especially common equity — along with the uncertain economic environment have eroded public confidence in the amount and quality of capital held by some firms, which is impairing the ability of the banking system to perform its critical role of credit intermediation. “
Despite the limited details, Wall Street analysts and traders are already using whatever glimmers of information that have seeped out to conduct their own “stress tests.” Investors are making bets on which bank stocks may rise or fall even before the official exam results are announced. The stress test criteria were released as federal regulators started briefing top executives from the 19 large banks about how their companies fared on the examination. In closed-door meetings at the regional Federal Reserve Bank offices, the regulators plan to review their preliminary findings and inform bankers if they need additional capital. The banks will have until Tuesday to dispute any of the results before they are made public on May 4.
via Regulators Disclose Criteria for Bank ‘Stress Tests’ – NYTimes.com.